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Worrying rise in young people becoming insolvent

Emma Lunn
Written By:
Emma Lunn

The number of people aged 18 to 25-years-old entering formal insolvency procedures has increased nearly 10-fold since 2016, according to tax firm RSM.

The firm is predicting that official figures, due to be published next Tuesday, will show a 9 per cent rise in personal insolvency rates in England and Wales in quarter two when compared to the same quarter last year.

The data from Tracker, RSM’s early online warning system, predicts that total insolvencies for the quarter will reach about 31,500 cases, comprising 4,200 bankruptcies, 20,500 individual voluntary arrangements (IVAs), and 6,800 debt relief orders (DROs).

The latest figures from RSM’s Tracker database also reveal that since early 2016, there has been a continuous rise in the number of young people entering a formal insolvency process.

While only 208 young people aged between 18 and 25-years-old entered into an insolvency process in the first quarter of 2016, by the end of the latest quarter ending June 2019, this had risen to almost 2,000.

There has also been a corresponding rise in the percentage of young people aged between 18 and 25 entering a formal insolvency process as a proportion of the overall number for all age groups. This proportion has grown from 1 per cent in quarter one of 2016 to 6.5 per cent in the latest quarter ending June 2019.

Alec Pillmoor, a personal insolvency partner at RSM, said: “The projected figures for Q2 show an increase in the levels of personal insolvencies when compared to the same quarter last year, showing that many people are still being over-optimistic when it comes to estimating their ability to meet scheduled repayments when they fall due.

“Of particular concern is the steady rise that we have seen in insolvencies affecting the 18 to 25 age group. There could be a number of explanations for this. We have been living through an era of low interest rates and relatively easy access to credit. Arguably young people without financial experience or relevant training may be more susceptible to the temptations of easy money without necessarily understanding how easy it is to rack up unsustainable debt.

“We’ve also seen an increase in more flexible – but less secure – ways of working. The rise of the gig economy and zero hours contracts have placed greater importance on the need to budget effectively. This could be proving a challenge for Generation Z.”

Different types of insolvency

  • Bankruptcy: Bankruptcy allows you to write off your debts and make a fresh start. Any assets you own may be used to pay off the money you owe. Making yourself bankrupt is a serious step and will have financial implications for a long time – you’ll find it very difficult to borrow money, rent or buy a property, take out contracts, or be employed in certain sectors.
  • Individual voluntary arrangement (IVA): An IVA freezes your debts and allows you to pay a proportion of them back over a set period – any money you still owe after this period will then be written off. As with bankruptcy, an IVA will make it difficult for you to borrow money, or rent or buy property.
  • Debt relief order (DRO): A DRO might be suitable if you’re on a low income with few assets and cannot afford to pay your debts. A DRO freezes debt for a year then writes it off completely if your circumstances haven’t changed.